January 26, 2023

What is a Power Purchase Agreement?

Secure your utility rate for the next 20 years

You’ve decided to rein in the utilities expense for your business, and you’re exploring solar. It may surprise you how many ways there are to finance a solar system.

Some companies pay cash and usually break even on their investments in 3-4 years – with decades of free electricity rolling in after that. But what if you don’t want to spend money upfront? What if you don’t have a tax liability allowing you to take advantage of Federal solar tax credits?

The Power Purchase Agreement (PPA) is an option many companies pursue because it requires little to no cash upfront and no responsibilities for upkeep or maintenance.

Because each business has different needs, it’s essential to consult a solar expert to understand which option is best for you – cash purchase, loan, lease, or PPA, for example.

What is a Power Purchase Agreement (PPA)?

A Power Purchase Agreement (PPA) is a long-term electricity supply agreement between two parties, a power producer and a customer. It can take many forms and is usually tailored to a specific application.

The power producer is usually a third-party developer who owns and installs the energy system, and the customer agrees to purchase the system’s energy for a predetermined period.

Benefits of a PPA

With a PPA, you continue purchasing energy from a PPA partner at a far cheaper rate than you would pay the utility.

A PPA provider will purchase the system, install it, and set a fixed rate schedule that saves most clients 30% to 50% of what they would be paying the utility. They take the federal tax credit and pass it on as part of your energy savings over time.

The PPA provider owns and maintains the system and becomes your new utility provider for a set term (usually 20 years, but it can vary).

What is a PPA escalator?

An escalator usually refers to an agreed-upon rate that increases over time. Some view it as inflation or interest built into the terms.

The escalator, if any, is also fixed at as little as half of what the utility offers. In other words, as utility rates increase by 3-4% each year, the amount you pay for your PPA remains fixed or increases at a fraction of what the utilities will charge.

No upfront costs

Most businesses appreciate the PPA because there are little to no upfront costs. No down payment, permitting fees, installation, or activation charges.

Think of a PPA like buying gasoline for your car from a provider who can guarantee a low fixed price, little or no increase over time, and assurance that your vehicle will be fueled when needed.

Usage and System Size Considerations

What is important to remember is that you are charged the fixed rate based on energy produced, not energy used. If you use less electricity in a given month, you still need to pay for the amount stated in the PPA.

To extend the car metaphor, if you don’t drive as far as you assumed, you still have agreed to buy the fuel. So the car owner might agree to buy ¾ of a gas tank each month at a special rate to protect against any situation where they buy more than they’ll use.

That’s why the sizing of your solar system is essential. Many PPA clients decide to offset a portion of their energy needs rather than the total amount, knowing that they will still save big on their utility expenses, even if they continue to buy a small amount of energy at a total price.

Long-term responsibilities

Over time, the PPA partner is responsible for monitoring, upkeep, cleaning, repair, and production. Since they own the system and sell you the energy, they want to maintain it at peak performance.

The PPA partner also keeps any tax credits based on the installation cost. If you sell your building before the term is up, transferring ownership of the PPA to the next owner is common, which can benefit a prospective buyer. Most PPAs allow the client to buy the system outright after a given period.

Solutions for Not-for-profit or religious institutions

Other clients who often use a PPA are not-for-profit or religious institutions because they do not have a tax liability that lets them take advantage of government solar tax rebates.

Green Convergence has installed many large-scale solar projects for religious institutions, including Grace Baptist Church in Santa Clarita and Shepherd Church in Porter Ranch.

Time for a site evaluation

The first step to discovering if solar is the right option is to partner with the right solar installer. Schedule a consultation with one of Green Convergence’s solar experts or request a no-obligation solar evaluation to see how you can boost your profits with solar.

Given our proven development history of multiple commercial projects, we will handle various processes for you, including the application, the interconnection agreement, the site development plan, and installation.


Our Affiliations